PESTELAND PORTER’S FIVE FORCES ANALYSIS: H & M CASE STUDY
EXTERNALENVIRONMENTAL SCAN: PESTEL ANALYSIS
Thecompany does not operate in isolation there are other determinantsthat are brought about by the external environment (Dineshbakshi.com,2014). This section analyzes the external forces that influence thecompany’s business activities. The factors involved are summarizedby the acronym “PESTEL.” PESTEL stands for Political, Economic,Socio-cultural, Environmental and Legal variables that a companyneeds to put into perspective to ensure that there is coherence andcompliance with factors beyond the jurisdiction of the organization(Olsen, 2014).
Thissection comprises of the factors that are influenced by thegovernment or the political environment (Olsen, 2014). These includeboth formal and informal influences of government to economicconditions or towards business activities. The degree of governmentinvolvement in business activities varies from country to country(Dineshbakshi.com, 2014). For instance, the European economy is fullycapitalist (Euromonitor, 2012). This implies that there is littlegovernment involvement in business. In such an economy, there isfreedom of creation of wealth as long as it does not involve illegaltransactions. Such freedom is favorable for the company to venture insince economic factors are controlled by the forces of demand andsupply.
Apartfrom government direct involvement in business activities, there areother various considerations with the inclusion of the tax policiesin place, trade restrictions and tariffs, labor laws, legislations onthe environment and political stability (Olsen, 2014). H&M hasless trade restrictions in Sweden, Canada and America (H&M.com,2014). This explains why the company does well in these regions. Itcould also be explained that the political environment is calmer inthe west than it is in Asia. Parts of Asia are prone to governmentcoups, not to mention insurgencies and strikes by rebels andterrorists. It is also factual that the labor force in the westerncountries is more educated and is well aware of their rights asopposed to their colleagues in the east. In turn, the governments inthe west have more stringent measures regarding the treatment ofemployees and their remuneration (Olsen, 2014). This explains why thecompany has its garments made in parts of China, India andBangladesh labor costs are relatively low. This, however, does notprovide a loophole for the company to exploit the ignorant employees,as it is in its corporate values to become an employer of choice. Itis, however imperative to take note that the company has more tocomply with in the west than in the east. In order to curb the gapsin the levels of expertise in both regions, the company has sought toexport some of its best employees to boost its operations in Asia.They have also put in place training exercises to ensure that all ofits employees meet to its requirements and standards. H&M hasmade most of its decisions with a great consideration of variablesthat are influenced by the political environment, hence achievingstrategic positioning.
H&Mis bound to adhere to trade customs as it sells its products acrossthe borders in the global market. In some places, this could be animpediment as the costs of exports into those regions could be veryexpensive. This happens where there are trade blocs that have placedhigh trade tariffs for all their exports towards their countries.Customs also relate to the export of labor. H&M mainly sourcesits human resources from Asia since the cost is cheaper. However,there are laws in place regarding such activities and the company’smanagement ought to be well versed with every bit so as to avoidlegal action.
Theseare factors such as the rate of economic growth, foreign exchangerates, rates of inflation and interest rates (Olsen, 2014). These arepertinent issues as no company would succeed in their oblivion. Aneconomy that has progressive steady economic growth favors thesuccess of companies (Olsen, 2014). H&M, in its, strategy,measures the viability of various economies before deciding toventure into them (H&M.com, 2014). For instance, the UnitedStates and Japan are among the world’s leading economies. H&M’sdecision to venture in these countries is an informed one and wouldnot disappoint them, if other impediments are held constant (H&M.com,2014). In such countries, the number of investors willing to providethe company with finances, in exchange for dividends and capitalgains, is higher than that in developing countries. Economic growthalso translates into the establishment of large businessorganizations as well as the accumulation of wealth, which are H&M’smain target (Olsen, 2014).
Highinterest rates discourage investments as investors are afraid to losea lot towards the payment of such, either to their annuities orprofits (Olsen, 2014). H&M’s investment in such countries oughtto be diversified by the opening of more stores in various parts ofthe world. Similarly, high inflationary rates or indications ofinflation should be something to watch out for. Even with H&M’smove into Asia, the management has done litmus tests to ensure thatthe economies into which they want to venture in have strong measuresto curb excess inflation.
Theprevious economic recession of 2008 has its effects still felt todate. The companies are slowly recovering. H&M was part of thosethat were severely affected by the financial slump. However, it hasworked its way slowly out of it and is back on its feet. During theeconomic recession, people did not have enough money to spend onluxurious clothing.
Anothereconomic factor that H&M ought to be sensitive about is theincreasing cost of labor in Asia. Over the years, H&M hasutilized the Asian labor market due to its little costs. However, asthe economies are growing, workers are agitating for betterremuneration and better working conditions and terms. The workershave formed trade unions that are negotiating for them collectively.These will translate to an upward shift in the company’s expensesthat will in turn reduce profits.
Theseare the factors that capture the cultural essence of the community inwhich the company is or will be based. These factors are importantdeterminants of the business`s success or failure and mostimportantly, how it will execute its strategic operational plan(Olsen, 2014). The social factors comprise of size of the populationand its growth rate, health consciousness, attitudes toward careers,age distribution of the populace and the people`s emphasis on safety(Olsen, 2014). H&M’s move to Asia could be hampered by the agedistribution in the various countries’ populations (H&M.com,2014). This could be a weakness in both the short term and long termas the company would lose it hold on the vibrant generation of theyouth.
Thecompany’s core values are also influenced by the Swedish culturefrom which the company originated. The Swedish culture has led to amore decentralized form of management as opposed to bureaucracy inother companies. This is a strength in that people develop loyalty tobrands and store run by H&M.
Theglobal society is also raising concern about the green business.People all over the world are advocating for businesses to takeenvironmental concerns into consideration. H&M ought to beconscious of these as negating it would translate to a bad reputationamong its buyers, both the loyal ones and the prospective ones aswell. It is also important that H&M is considerate of religiousdoctrines that influence the code of dressing. For instance, thecompany should produce more Islamic-oriented clothing for sale in theMuslim Asia regions. The trend should be transcended to othercommunities accordingly. Negligence to the communal needs and demandswould be viewed as a threat while abiding by them is a greatopportunity for capturing the market.
Thisinvolves issues related to the ecology and some environmentalcomponents such as technological incentives, the R &D activityand technological change (Olsen, 2014). These are important aspectsthat any organization, including H&M, ought to put intoconsideration. Unresponsiveness to the adoption of technologicaladvancements pushes a company to a losing edge against its promptcompetitors (Olsen, 2014). On its part, H&M, in its strategicplan, highlights that it is in possession of the leading technology(H&M.com, 2014). It is therefore at a competitive advantageagainst it competitors. The management is keen to assure its clientsand investors that they would enjoy the features and functionality ofpremium technological systems. The management states that thecompany’s technology is designed to suit customer needs by ensuringthat the least time is spent in the delivery of quality products andservices (H&M.com, 2014). H&M’s technology is designed toaccommodate changes and innovation for better quality delivery. Thisacts as a great strength in both the short term and long-term as thesystem will easily adapt to changes in the market and demand. This isa wise strategy as rigidity would be expensive and time consuming,bearing in mind that technology is rapidly evolving (Olsen, 2014).
Thecompany spends a fortune in Research and Development. Their teams arehighly experienced and effective. It is up to the management to seeto it that the proposed technological innovations are implemented toenhance the company’s performance in the industry by providing acompetitive edge. H&M should also enhance the e-commerce andm-commerce. They have made a remarkable milestone by enabling clientsto buy their goods online from their website and other online stores.This has enabled the company to increase their sales, and henceprofitability that will transcend to the future if the trend ismaintained.
Technologyis the most dynamic aspect of the business`s external environment(Olsen, 2014). Technological advancements emerge with every passingday. H&M Financial has a flexible technological structure thatfavors changes. The internet is one very volatile aspects it comeswith a myriad of threats and opportunities. H&M has an intactresearch team to study these changes and advising on which ones toinvest in.
Theseare factors associated with the weather, climate and climatic changes(Olsen, 2014). H&M Financial Company has to study the weather andclimatic changes other areas that it invests in and also those itintends to move on to. This because, a player in barrels, weather andclimate are potential perils that could alter the company`s strategicplan. Unpredicted changes such as the occurrence of Tsunamis andTornados would translate to the payment of claims whose real valuewas not reflected in the payment of premiums. This implies that thecompany could be making losses from just a few occurrences of suddenweather changes. Climatic changes could also have adverse effects onthe health of life assurance policy holders. The increase of theprobability of occurrence of risk puts the company at a losing end(Olsen, 2014). The company is also reliant on cotton and a decline inits production, owing to weather and climatic changes, wouldtranslate to high production costs.
Thecompany also ought to be conscious of conserving the environment andutilizing natural resources such as energy. This could be done byreducing environmental pollution and enhancing efficiency of energyand reducing wastages. By adhering to environmental demands, thecompany will have earned itself an advantage as the global communitywill take note of the improvements and form consumer loyalty.Effective study of the environment, too will give H&M acompetitive edge by being able to plan about its supplies earlierbefore its competitors.
Thesesection includes the legislations that a company ought to complywith, to avoid being into loggerheads with the law. Some of thelegislations include consumer laws, discrimination laws, health andsafety laws, antitrust laws, employment laws among others (Olsen,2014). These factors influence a company`s employee composition, thecosts incurred in hiring, remuneration and overall production, andalso the way in which the company runs its activities. In itsstrategic plan, H&M outlines the various legal considerationsthat are required of the company to fulfill and how much it will costthe company in the achievement of that.
Theregulations on increment of wages for employees are on the rise(Olsen, 2014). It is in H&M’s values to ensure that it becomesthe employer of choice it, therefore, has subsequently adjusted itsfinancials to ensure that it does not lose employees to competitors.This is a important milestone and advantage as it attracts the bestexperienced employees and motivates them to yield their maximum. Italso achieves safety from lawsuits that would tarnish its reputation.
Thealterations in the rates of tax are a key issue (Olsen, 2014). Owingto the variations in the economic environment, governments vary taxesas part of the fiscal policy to control inflation. H&M is wellaware of this trend and has accommodated it in its strategy.
PORTER’S5 FORCES ANALYSIS
Thistool was developed to determine the profitability and structure of anindustry. It utilizes five divisions namely: Bargaining power ofsuppliers, bargaining power of consumers, threat of new entrants,threats of substitutes and the ultimate competitive rivalry. Thissection looks at the apparel industry, in which H&M ventures in.
Thissection looks into the concentration of suppliers with regard tocompetitors. It examines the risk that is associated with mostplayers being dependent on only a few suppliers.
Theindustry relies greatly on suppliers who are located in counties suchas India and China where the labor cost in the making of garment isrelatively cheap. However, suppliers’ bargaining power is low. Thisis because H&M is a big multinational company and it could shiftits demand for supplies to any other willing suppliers around theglobe at relatively low prices. In addition, H&M has set highstandards for their suppliers in a bid to ensure theirsustainability.
H&M’ssupplier power is low owing to the fact that its suppliers havehomogenous products to offer to customers (H&M.com, 2014). It isdifficult for the suppliers to alter the design of products so as tosuit a customer`s needs. The products in the hands of suppliers aredependent on forces which are beyond the control of the suppliers(Natasha, 2014). In order to solve this problem, H&M may focusmore franchising and branching, so as to reduce the distributionchain (Natasha, 2014). They should consider enabling suppliers totailor some products to cater for specific customers’ needs.
Thissection extrapolates the barriers and hurdles that the industry posesto prospective firms who wish to join the industry.
Barriersare high to block new entrants in the fast fashion industry(Jarlaczyk, 2014). The threat of new entrants making their way intothe apparel is low, regardless of the already existing competition.However, H&M enjoys economies of scale as a major advantage aswell as a large network of suppliers (Nawaz & Saleem, 2013). Thecompany also upholds a high and accountable code of corporate socialresponsibility. These competitive advantages will pose a greatchallenge for new entrants to meet to the levels that H&M isalready soaring in. The journey to reach and overtake H&M, aswell as other well established companies in the industry, will bevery expensive for new entrants as they attempt to mimic what thegiants are doing (Reveley-Mahan, 2014).
Thissection looks into the distribution of buyers and their power tobargain in quality and prices. This depends on productdifferentiation and the amount that a customer is willing to buy.
Buyersbargaining power is moderate. This is owing to the fact that currentconsumer behavior is moving towards brand loyalty. Consumers will gofor products that satisfy their needs and that are fairly priced. H&Mprovides exactly that and with the low costs for fashionable items,customers have no option but to fall for them (Kavvadia, 2014).
Onthe other hand, it is of importance to note that H&M is aretailer. This means that the company has to conform to customersimmediate demands on tastes and preferences (Holm & Holm, 2010).In this way, the customers have little bargaining power on thedesigns and quality of clothing they would want to buy from H&M’sstores.
Thisarea focuses on the other substitutes that could replace the productsbeing offered in the industry. It lays focus on buyers’ propensityto substitute and opportunity costs.
Thereare no substitute products offered in other industries that can takethe place of clothing. However, there is the consideration ofopportunity cost people have many other ways to spend their money.H&M should then reconsider its pricing and promotional strategyto ensure that it lures as many customers as possible towards itsproducts. For instance, online stores could be a great threat to H&M.The management should put measures in place measures curb thisthreat.
Theindustry is oligopolistic in nature. Companies are interdependentmeaning that every firm has to put others into consideration. Themarket has a lot of companies trying to establish themselves in thesame market as H&M. Competition in this kind of market can betermed as fierce as all the companies are struggling to take a pieceof the pie (Natasha, 2014). The number of rivals is ever growing. Thecompanies that offer the greatest rivalry are Gap and Zara that areas fashionable as H&M is in the market. The strategy employed andthe hastiness could define winners and losers. In this markets, theirscramble for information and unnecessary price wars. These could bedangerous to the success of the industry as the companies will wearthemselves off in the tussle for customers and the reduction ofprices in the market (Natasha, 2014). H&M has to be on thelookout, to obtain as much information as possible and design ways inwhich they will improve their operations. All the same, H&M hasbeen able to get to its current position through efficient supplychains, offering multiple brands and outsourcing production (Holm &Holm, 2010).
H&Mis faced with a great challenge as it does not score very well asZara reported higher market capitalization. The company is subjectedto non-ending rivalry rivals who offer substitutes of H&M’sproducts, poor supplier powers, as well as the many barriers thereare in the entry into new markets (Jarlaczyk, 2014). However, it iscommendable that the company envisages high buyer power. Themanagement ought to adjust its strategic plan to cater for theimprovement on the various weaknesses.
Thefast fashion industry that H&M venture in is attractive sincedespite the intense rivalry, they are able to obtain commodities atrelatively low prices as bargaining power of suppliers is low theselling prices are also considerable profitable as the customer’sbargaining power is moderate new firms are restricted from competingwith the giants hence there is no threat for further competition andwasteful price wars and there are no physical substitutes to theproducts provided in the industry.
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